Investment Banking

The Feud at the Top of Morgan Stanley

Colm Kelleher and Paul J. Taubman, co-presidents of the Institutional Securities Group at Morgan Stanley (MS), work on opposite sides of an ocean, disagree about strategy, and share an enmity that has become the subject of company jokes.

At a meeting of more than 100 managing directors at the Ritz-Carlton Battery Park hotel in New York last year, Robert A. Kindler, the bank’s head of mergers and acquisitions and brother of stand-up comedian Andy Kindler, drew laughs and whistles when he ribbed the men about their relationship, according to two people who attended the session. “So how’s that co-head thing going?” Kindler asked, gesturing at the two men.

Neither Kelleher, 54, a gregarious former fixed-income salesman based in London, nor Taubman, 50, a reserved New York-based banker who has advised media clients on mergers, responded to the taunt, say the people, who asked not to be identified because they weren’t authorized by the bank to speak. Kelleher has been more vocal offstage, insulting Taubman in front of colleagues, according to two former Morgan Stanley executives.

The feud between the men has led to lost business opportunities, in addition to wasting colleagues’ time, according to six former executives. The Institutional Securities unit, which combines investment banking, sales, and trading, is critical: It generated $8.8 billion of revenue and $1.7 billion of profit in the first half, accounting for 79 percent of Morgan Stanley’s total earnings.

President and Chief Executive Officer James P. Gorman, who appointed the men to their posts in December 2009, will tolerate the tension between Kelleher and Taubman so long as their group performs, a current colleague says. This year, Morgan Stanley has maintained a leading position in investment banking and recovered some trading market share lost after the financial crisis. “The fact is, Institutional Securities just produced one of its strongest quarters ever in a very challenging environment, with the firm taking market share across many areas,” says Mark Lake, a company spokesman. Kelleher, Taubman, and Gorman declined to comment.

Kelleher and Taubman share a common ambition: Each sees himself as a potential future head of the company, according to three people who know them. Both are candidates to become president after Gorman, 53, gives up that title when he succeeds John J. Mack, who is retiring as chairman in January. The feud between Kelleher and Taubman may hurt their chances for advancement, four former executives say.

One of nine children who grew up in Ireland’s County Cork, Kelleher, an Oxford graduate, is fond of a daily Cuban cigar and off-color jokes, plays golf, collects modern British art, and drinks with colleagues. A former fixed-income salesman, he was chief financial officer during the 2008 financial crisis, when Morgan Stanley secretly borrowed $107 billion from the Federal Reserve, the most of any bank. He conducted business lying down on his office floor after suffering a back injury in a car accident.

Taubman, the son of an accountant, was born in New York and graduated from the University of Pennsylvania’s Wharton School in 1982, joining Morgan Stanley that year. He helped negotiate a $9 billion investment from Tokyo-based Mitsubishi UFJ Financial in September 2008 that helped the company survive the financial crisis. A former colleague describes him as a good person for a quiet, problem-solving conversation, not a chat over a beer.

Taubman and Kelleher’s relationship was rocky at least as far back as their being named co-heads, say two former executives who worked under them. The statement announcing the appointments described a shared leadership, with Kelleher “overseeing” sales and trading and Taubman “focusing” on banking. The arrangement didn’t last. A year later, Gorman moved Kelleher to London and put him directly in charge of sales and trading while giving Taubman sole responsibility for investment banking.

The men speak to each other infrequently and usually don’t coordinate their remarks at internal presentations, the colleagues say. They disagree about how aggressively to push clients for additional business after stock or bond offerings. Investment banks often pitch clients to win derivatives business, such as an interest-rate or currency swap, related to a sale of stocks or bonds. Kelleher favors seeking the additional transactions, which can bring in significant trading revenue. Taubman is more cautious about such deals, because they can place the bank in the awkward position of being on the opposite side of a trade with a client it just advised.

Along with creating obstacles to doing business, such discord is bad for morale as well. “What happens is people spend time politicking, which has some costs,” says Steven Kaplan, a professor at the University of Chicago Booth School of Business who studies corporate governance. “It’s the CEO’s or the board’s job either to try to get them to stop feuding, or you remove one.”